OnStartups

So, do
cheapskates make the best early customers for a startup. In a word:
No.

But, since you’ve already interrupted your busy day to
read this, let’s take look at this a wee bit deeper and explain why I
don’t think cheapskates make the best early customers. For purposes
of our discussion, rather than using the more controversial
“cheapskate” label (which makes for a good blog title, but is not
the best characterization), lets use the term “unreasonably
frugal”. Even this is not perfect, but will serve our
purposes. Basically, the central idea here is “customers that are
by nature highly cash-conservative and whose strategy is to look for the
cheapest solution for most things.”

Here are some of the most likely counter-points people might
make to my assertion that these frugal clients don’t make the best early
customers for a startup:

1) Won’t frugal
customers help me ensure there is sufficient “value” in my product? Maybe, but
probably not. A lot depends on what the primary premise of your offering
is. Are you offering an innovative product – with very few
alternatives? If so, then the frugal customer is likely not your best
choice of customer. Frugal customers are seeking to get the best deal
possible (often regardless of the price-point or potential value). As
such, they will push your startup to squeeze whatever value they can.
Though we’d like to believe this “squeezing” helps us focus
our offering, take costs out of the equation and offer a better
“value”, it doesn’t seem to work out that way in the early
stages. My argument is that what an early-stage software startup needs is
not someone to push them to deliver a cheaper solution, but one that is better differentiated and can be offered at a
premium. Instead of trying to take cost out, you should be working to add
value in at this stage. More on this in the next point.

2) Won’t
frugal customers help me “stretch” my product in the right
direction? Once again, maybe – but probably not. There are two primary
mechanisms by which clients can stretch you and get more from your
offering. One is to stretch you in what I would call the “services
dimension”. In this dimension, clients lean on you for a combination
of training, support, hand-holding and customization so that they can get more
out of your offering. The other is to stretch you in the “product
dimension”. In this dimension, customers are pushing you to add
more capability to the product so that they are less dependent on you and they
can do more things themselves. I would argue that frugal customers
generally tend to want more services (because this reduces their work in the
short-term and increases the value they get for the same price) whereas the other kind of customers are often pushing
you to remove your services from the equation because they’d rather have
control. These latter kinds of “forward thinking” customers
are the ones you want. They’ll make you work hard to get you to
stretch your product so that they can do more with it. The upside to you
is that growing your product in this way (within reason) gives you more
leverage. The time you spend adding a new capability will benefit future
clients as well – and in theory, gives you the hope of a price premium or
more differentiation in the future. In the long run, this is a better
thing.

3) Aren’t any customers I can cajole into buying,
good customers? No, they’re not. As a software
entrepreneur, you’re making a series of decisions along multiple
dimensions. Many of the “interesting” decisions involve
tradeoffs. On the product front, you have to decide whether or not to add a
feature or capability. On the customer side, you are deciding whether or
not to take on a specific customer (or not). Yes, you heard that right.
Even in the early stages, you should be turning away some customers regardless
of how desperate you are for cash and regardless of the validation it may give
you. In the early stages, you should be looking for customers that are
generally aligned with where you are taking the company and product.
Interestingly, most entrepreneurs instinctively know whether a customer
will be a “bad” customer or not. The challenge is acting on
that instinct and walking away (politely) when necessary. The right
customers are those that are innovative, looking to gain some advantage (even
if temporary) and willing to take a risk for that potential gain. They
are the classic “early adopters”. (Read “Crossing The
Chasm” on the suggested
reading list if you have not done so already. Moore does as good a job explaining this as
I’ve seen so far).

In a future article, I’ll look at this topic in much
more depth and answering the broader of question: What makes for a good (or great) customer for an
early stage software startup? If you have thoughts or ideas on
this, please leave a comment. Will try to incorporate as much as I can in
the future article.

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